The costs associated with administering an employer-sponsored 401(k) plan have always been an issue that requires great care. Employers may soon find this task a little easier, thanks to some recent court rulings. The focus of the various courts has not been on the actual amount of fees charged, but on the objectivity of the process for determining those fees.

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It May Be Time for Another
401(k) Fee Review

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The regulatory and legal pressure on employers to tightly monitor their
401(k) plan costs has always been strong, but employers may soon find a
little help. At the same time, the heat is on from the federal judiciary, as the
U.S. Circuit Courts of Appeals and the U.S. Supreme Court are laying down
the law in this area. On a related note, small employers who are still asleep
at the switch when it comes to this area of responsibility need to wake up.
Here are the details.
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A recent survey of small companies (defined as 100
or fewer employees) revealed the following, with
respect to plan fees. The answers are expressed as
percentages of total survey responses:
• 17 percent did not receive a fee disclosure statement from their plan provider
• 13 percent received the statements but found them incomprehensible
• 60 percent considered their fees less than "very reasonable"
• 35 percent have not compared their 401(k)s to comparable plans in their market
• 14 percent believe total plan fees in the 4-6 percent-of-assets range is fair
• 13 percent believe total plan fees in the 7-10 percent range is fair
• and 17 percent say they don't know what a fair fee would look like
The survey, conducted on behalf of ShareBuilder 401k, shows pockets of
resistance remain among small employers towards fulfilling their fiduciary
obligations. This is true even though it has been nearly two years since the
Department of Labor's (DOL) 408(b)(2) fee disclosure rules took effect. Most
employers should have already received two cycles of fee disclosure
documents by now, alerting them to possible red flags.

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To help those employers who find the statements undecipherable, the DOL
has issued proposed regulations that require 401(k) vendors to furnish a
roadmap to their fee disclosure statements. According to the DOL, the
"locator" directory will tell you where to find:
• The description of services to be provided;
• The statement concerning services to be provided as a fiduciary and/or as a
registered investment adviser;
• The description of: all direct and indirect compensation, any compensation which
will be paid among related parties, compensation for termination of the contract
or arrangement, as well as compensation for recordkeeping services; and
• The required investment disclosures for fiduciary services and recordkeeping and
brokerage services, including annual operating expenses and ongoing expenses,
or, if applicable, total annual operating expenses.

5. Evidence of Negligence
These regulations might not take effect until next year. Meanwhile, how you
administer your 401(k) plan is critical. It must be administered consistently, in
terms of how the federal courts interpret ERISA with respect to particular
fee-related matters. Perhaps the most heavily watched case lately has
been Tussey v. ABB Inc. Recently the U.S. Court of Appeals for the 7th
Circuit,
based in St. Louis, upheld a key part of a lower court's ruling against the
employer, ABB.
ABB's employees complained they were being over-charged for fees by the
plan's record-keeper, Fidelity Investments. Fidelity was receiving some
compensation by taking a slice of the asset management fees in a revenue-
sharing arrangement accepted by ABB's 401(k) plan trustees. Below you'll
find the reasons the court sided with the plaintiffs on the excessive fee
charge. These reasons provide a roadmap you can use to determine whether
you are meeting your obligations.
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ABB:
• Had never determined the record-keeping fees the plan was being charged
through the revenue-sharing arrangement,
• Never tried to assess the reasonableness of those fees, and, in fact, never
figured out what those fees actually amounted to,
• Failed to use its size as leverage to negotiate a more competitive fee structure
-- an opportunity even for small employers, since at least they are larger than
individuals paying retail prices -- and
• Failed to make a good faith effort to prevent the subsidization of non-401(k)
related services charged by Fidelity, enabled by the fee-sharing arrangement.
Those services included payroll processing and record-keeping for a defined
benefit pension plan and its welfare plans. That failure was made more serious
than it might otherwise have been because an independent consultant warned
this cross-subsidization might be taking place.

7. The Supreme Court is Watching
In a similar case (Tibble et al v. Edison International), the U.S. Court of
Appeals for the 9th
Circuit in San Francisco last year ruled Edison's use of retail
class mutual fund shares in its 401(k) plan represented a breach of its
fiduciary duty to plan participants, since it could instead have used more
economical institutional class shares. The U.S. Supreme Court has expressed
an interest in that case, asking the DOL for its opinion on the matter. This
suggests the high court would rule on the case if asked.
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Meanwhile, the Supreme Court has already heard arguments on another
401(k) case, involving a different issue: the appropriate use of employer stock
in the plan. The plaintiffs in that case (Fifth Third Bancorp v. Dudenhoeffer) had
seen the value of their 401(k) balances take a hit when the employer stock
plummeted. This stock represented a substantial proportion of plan assets.
The issue the high court will wrestle with is whether Fifth Third Bancorp's
decision to maintain the plan design was reasonable or not, in light of the
inherent investment hazard caused by limited diversification.
Perhaps the main take-away from these cases isn't a definition of appropriate
fees, but the critical importance of having objective processes in place to make
the determination. In the ABB case, the court made its point this way: "The
[fiduciary] standard is not concerned with results; rather it is a test of how the
fiduciary acted viewed from the perspective of the time of the challenged
decision."

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10. 14550 Torrey Chase Blvd., Ste. 360 Houston, TX 77014 USA
www.hrp.net
E-mail : info@hrp.net
Toll Free
Phone
Fax
:
:
:
877.880.4477
281.880.6525
281.866.9426